The following information is provided for the Delta Corporation (amounts are in millions): Assume deferred taxes and any other non-cash asset accounts are negligible.
-Refer to the information above. Cash flows are expected to grow indefinitely at 6% after 2011. The firm's cost of capital is 10%. What is the terminal value of the firm at the end of 2011?
Round your answer to the nearest hundred thousand dollars.

Question

The following information is provided for the Delta Corporation (amounts are in millions):  Assume deferred taxes and any other non-cash asset accounts are negligible.
-Refer to the information above. Cash flows are expected to grow indefinitely at 6% after 2011. The firm's cost of capital is 10%. What is the terminal value of the firm at the end of 2011?
Round your answer to the nearest hundred thousand dollars.

Quizplus · Accepted Answer

The terminal value at the end of 2011 can be calculated using the Gordon Growth Model (also known as the Perpetuity Growth Model), which is given by the formula: Terminal Value = (Cash Flow for Next Period) / (Cost of Capital - Growth Rate). Assuming the cash flow for 2012 (the next period after 2011) is growing indefinitely at 6% from a 2011 base, and given a cost of capital of 10%, the formula simplifies to: Terminal Value = Cash Flow 2012 / (0.10 - 0.06). Without the specific cash flow for 2011, we cannot calculate the exact number, but given the options, the correct approach to find the terminal value involves applying this formula, which leads to the selection of the option that fits the result of such a calculation. Since the exact cash flow number for 2011 is not provided, the correct answer is chosen based on understanding the formula and the growth and discount rates provided.

The Following Information Is Provided for the Delta Corporation (Amounts